Municipal Monthly

Munis and the Markets, November 2018

A brief monthly update on what's happening in the municipal bond market.

Month in Review

  • The Bloomberg Barclays Municipal Bond Index returned 1.11% in November. The Bloomberg Barclays Municipal High Yield Index underperformed the investment grade segment of the market, returning 0.70% on the month, driven by strong returns in the water & sewer and lease backed sectors.
  • Over the month, muni yields rallied across the curve. The intermediate portion rallied the most by between 18 – 25 bps. Munis outperformed the US Treasury Index over the month, and, on a duration- and quality- matched basis, the MMD/UST ratio richened 2-3 pp across the curve.
  • Muni bond mutual fund demand was negative during the month. Lipper reported -$5.37 billion in net outflows for the month, largely from flows out of long term funds.
  • November supply was down 26% versus previous month at $27 billion, and down 40% year over year. Annualized supply is tracking down 22% versus 2017. This is as expected, given heightened supply in late 2017 in anticipation of tax-reform, and the elimination of advanced refunding transactions.
  • As stated previously, the reduction in the corporate tax rate from 35% to 21% has made munis less attractive to certain institutions (banks and P&C insurers). This is especially evident in bank holdings, which have decreased by $39.5 billion YTD, a 6.9% decline. Lower liquidity in the muni market and additional marginal supply are both implications of this decrease in banks’ muni holdings, as banks were traditionally a large source of demand for muni debt. This dynamic is especially evident on the long end of the curve where banks traditionally had most of their holdings. The shift in bank holdings has weighed on prices for long-dated securities, adding a headwind to this part of the muni market, and has resulted in a steepening of the muni yield curve.


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A Word About Risk: Investing in the bond market is subject to risks,including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and the current low interest rate environment increases this risk. Current reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. Investors will, at times, incur a tax liability. Income from municipal bonds is exempt from federal tax but may be subject to state and local taxes and at times the alternative minimum tax.

The Bloomberg Barclays Municipal Bond Index is a rules-based, market-value-weighted index engineered for the long term tax-exempt bond market. The Bloomberg Barclays High Yield Index is an unmanaged market-weighted index including only SEC registered and 144(a) securities with fixed (non-variable) coupons. The Bloomberg Barclays High Yield Municipal Bond Index is a rules-based, market-value-weighted index that measures the non-investment grade and non-rated U.S. tax-exempt bond market. It is not possible to invest directly in an unmanaged index.

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